Tobacco Update CyberConference: more spending money for low income consumers/worry entry of big tobacco in OTP..

May 26, 2009 - Nik Modi sector analyst at New York City-based UBS Securities LLC - CSPNetwork's Tobacco Update CyberConference.

Modi feels that low income consumers will have a little extra money to spend in a down economy. Food prices have come down slightly in the past year, and gasoline prices have nearly been cut in half, loosening the wallets of 60% of cigarette smokers—who make less than $40,000 annually. According to Modi, last year at this time gasoline prices were about $3.74 per gallon, and they are currently around $2.24, with the savings equating to the price of 209 packs of Marlboros or 142 tins of Copenhagen per year.

Modi also addressed the big question on most tobacco retailers' minds, how the federal excise tax (FET) increase will impact the industry. Based on historical price elasticity calculations, he said that he expects the tobacco industry to decline 8% to 10%, which would roughly be 4% to 6% worse than the normal trend rate of decline. After the next 12 months, Modi expects industry decline rates to return more or less to normalized levels, however.

Premium cigarette brands will likely be "less affected," since price gaps between premium and discount would narrow. This is particularly true as state excise taxes increase. A state excise tax of up to 50 cents means a price gap between premium and discount of 51.9%, but a $1.50 state tax narrows that substantially to 27%, which could lift the premium market share to as much as 94%.

Joe Teller, director of category management for Richmond, Va.-based Swedish Match was clear: Retailers should maintain control of their other tobacco product (OTP) category. He cautioned that cigarette companies entering the foray—with Altria Group Inc.'s purchase of UST Inc. earlier this year and Reynolds American Inc. purchasing Conwood Co. in 2006 and selling Camel Snus—could be a game changer. "These companies are used to doing whatever they can do to manage their brand share in the declining cigarette business," he said. "The last thing anybody wants to see is the OTP category turn into some version of cigarettes." Cigarette sales were up 2.4% in dollar sales, but down 6.1% in profits, according to the NACS survey.

While growth rates in can sales continued to be in the double digits for portion pouch (21.8%) and low price loose (10.8%), according to ACNielsen numbers. However, the decline of premium loose snuff (-4.2%) has held overall category growth down.

Reference: Taking Control of Tobacco Industry professionals share thoughts on the economy, taxes, staying in control by Linda Abu-Shalback Zid, Convenience Store/Petroleum (CSP) Daily News, 5/26/2009.

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